The Stock Market, Labor-Income Risk and Unemployment in the US: Empirical Findings and Policy Implications

This study looks into the linkages between rates of return in stock markets - and stock market volatility - and labor income risk and the unemployment rate, respectively, in the United States. After considering basic theoretical links between labor income risk plus unemployment and stock market dynamics, an empirical analysis is conducted which follows two earlier papers by FAMA/FRENCH and FAMA/MACBETH in terms of their empirical approaches. The new approach presented here includes additional variables while interesting results regarding Granger causality analysis are also derived. We find that rate of return development is Granger causal for labor income risk and unemployment in the US. Labor income and unemployment significantly affect the stock market rates of return and the volatility of such returns. There are several key policy conclusions based on the empirical findings presented herein; the results indicate that stocks provide a rather good hedge against labor income declines. Crucial conclusions could be drawn in particular by the US Administration, in particular the new Biden Administration.